SB 1211 is signed into law, a win for CA housing inventory
Sean Roberts, CEO of Villa
It’s official. California Gov. Gavin Newsom just signed Nancy Skinner’s SB 1211 into law on September 19. This is a significant piece of legislation aimed at expanding housing opportunities by allowing more ADUs on multifamily properties.
Prior to SB 1211, California law allowed up to two (2) detached ADUs on multifamily properties (along with additional interior ADUs, so-called ‘conversions’, provided they are built in the existing building in places like basements, garages, or other converted interior space). While this led to a lot of new housing units being added to multifamily properties in recent years, it ultimately meant that for some properties that had limited existing interior space suitable for conversion but that had space to build more exterior units, those properties were restricted from adding more housing units. With the passing of SB 1211, the limit for detached ADUs on multifamily properties has been increased from two (2) to eight (8) units, depending on the number of existing multifamily units on the property. SB 1211 also prohibits local governments from requiring replacement of surface parking when existing parking is repurposed for ADUs, which helps get more of these homes built in locations that need them.
SB 1211 addresses the urgent need for affordable and accessible housing options across California, especially in urban areas facing severe housing shortages. By further easing restrictions on ADU construction, the legislation empowers property owners to create more living spaces, thereby contributing to the state’s broader housing goals. This approach not only makes better use of existing infrastructure but also offers a relatively quick and cost-effective solution to take a dent out of the housing crisis. There are more than 4 million apartment units throughout California (per the Census Bureau’s 2022 American Community Survey data) and many of these are located within properties that are well-suited for additional development of detached ADUs all over the state.
SB 1211 is a smart policy for California for several reasons and we at Villa have been enthusiastic supporters of the bill since it was introduced by State Senator Nancy Skinner. From Villa’s vantage point, we see several benefits of being able to build a greater number of detached ADUs per multifamily property, including:
- Economies of scale reduce marginal costs per unit. By being able to build a greater number of units together at one time (eight instead of two), the overall marginal cost per unit is typically reduced as several of the costs associated with construction can be spread across a greater number of detached units. For example: (i) costs for running and upgrading utilities infrastructure can be spread out across more units, (ii) if using prefab construction, certain fixed costs (like installation labor and cranes for lifting modular units into place) can be spread out across more units, and (iii) costs for things like design, project management, construction management, and other ‘fixed’ costs can be spread out over more units. By reducing the marginal cost per unit, even more projects will now make economic sense to build and the rents required to “make the math work” for returns to property owners can be lower (which is ultimately good for residents).
- Being able to build more units enables building smaller units which can be offered at lower rents to residents. When multifamily property owners are constrained by only being legally allowed to build two detached ADUs, they will naturally skew towards maximizing their return-on-cost which often means they will build the largest (and highest rent) units they can to maximize value based on what they are allowed to build. When property owners are allowed to build more units (as they now are under SB 1211), there is a greater incentive to build a higher number of smaller units which are typically cheaper to build and therefore can be offered at lower rents to the residents. This is a win-win-win for the property owner, residents, and the overall community by getting more housing created.
- Projects that previously did not “pencil” now make economic sense to build. When multifamily property owners were constrained at building only up to two units, they too frequently found that the cost/benefit of doing only two units did not make economic sense to them. Costs to do utility upgrades or other infrastructure were often too high to make sense for building only two units. However, with now being able to build a greater number of units (at a lower marginal cost per unit as noted above), the economics look very different and projects that were previously infeasible are now economically sensible to build. This opens up a pathway for more attainable units of housing to be created in great locations all throughout California.
- Clears the path for private capital to efficiently add more housing supply. By opening up a pathway for more detached ADU construction on multifamily properties – which are typically in great locations where people want to live, work, and go to school – this policy clears the way for private capital to continue to step-up and add additional new units of housing.
- As a reference point, “Affordable” housing projects often require significant public subsidies and other government funding – for example, the LA Times cited that the cost of several “Affordable” housing developments was upwards of >$1M per unit in 2022, and those projects required significant taxpayer-funded subsidies to get built. With Sb 1211, enabling more detached ADUs to be built by private capital (without taxpayer-funded subsidies) at a fraction of the cost is good for everyone.
- Every additional unit of housing added helps create more housing availability and marginally helps affordability, so having private capital funding the creation of more units of housing makes a lot of sense.
- Moreover, the institutional owners of these properties are typically sophisticated and understand development and construction, have a desire to build these homes, and typically have a lower cost of capital than individual consumers looking to build ADUs (as larger institutions can borrow funds at lower interest rates than individual homeowners, typically, which further reduces the marginal cost of the added housing units after financing costs are factored in).
Back in March, I was delighted to join the California State Senate Housing Committee in Sacramento to speak in support of SB1211, a bill that provides a pathway for multifamily property owners to add more detached ADUs to their existing property.
Over the past decade, California has introduced multiple laws to promote the development of ADUs, which are less expensive to build compared to traditional housing and help fill in underused spaces in urban areas. Today, ADUs represent the fastest-growing segment of the housing market. A decade ago, California issued permits for only about 800 ADUs annually, but that number has now skyrocketed to over 20,000 each year, reflecting the growing role of ADUs in addressing the state’s housing needs. ADU policy is working well to create more homes for Californians and continuing to lean into the creation of additional units of supply in the form of more detached ADUs on multifamily properties is smart policy.
Villa and other advocates for innovative housing solutions see this legislation as a critical step forward in addressing the state’s long-standing housing challenges. We are also optimistic that other states that are looking for solutions to their own housing shortages will continue to observe and learn from the success of policies that have worked well in California and consider adopting similar policies, suitable to their particular state, to help catalyze the creation of more housing where it is needed. Opening up pathways for ADUs to be built on multifamily properties is a smart way to catalyze production of homes funded by private capital and we hope to see more jurisdictions embrace this type of policy in the not-too-distant future.
Villa is actively partnering with multifamily operators to take advantage of this significant opportunity. You can learn more about that work here.
As always, we’re thrilled to see the continued momentum at the local, state, and federal level in support of smarter infill development and opportunities to use prefab housing at scale.
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